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Active managment – Going beyond the index

The debate over the merits of active and passive investing has been going on for some time. Ivy believes investors can derive the most long-term benefit through exposure to well-researched actively managed funds.

Market Perspectives/ 05.08.20

Looking beyond stock market volatility

Market volatility can be unsettling, but history shows that prices have returned to less volatile patterns over time. That can be good news for long-term investors.

Market trends show long-term investors generally have been rewarded over time. However, periods of extreme volatility can challenge even the most seasoned investors. Ivy believes having a perspective of the markets and the factors affecting them can be helpful in assessing current opportunities.

Navigating the Psychological Toll of COVID-19

Discover practice tips to helping support your clients during the pandemic.

Genlink

A succession plan for the next generation

You’ve spent your career teaching clients the importance of retirement planning and how to protect their assets. But have you considered what will happen to your business when it comes time for you to pass it to the next generation of advisors?

Genlink

Generational happiness

From loyalty to impact and autonomy to experiences discover how each generation defines happiness.

Ivy Investments

We stand for a legacy of expertise, focused on delivering strong, long-term results. Our name reflects our progressive product offerings and growing global presence as we continue to adapt to the needs of investors.

Ivy Securian Core Bond Fund

Commentary as of April 08, 2020

What are you seeing in the current market environment and how has the portfolio behaved? And obviously no one had a global pandemic in their scenario analysis, so how are you seeing the investment landscape in light of the recent environment?

Tom Houghton: On the positive side, it appears the COVID-19 curves are flattening in the U.S. and around the world. The Federal Reserve (Fed) and other central banks are pulling out all the stops to help stabilize the markets. For the first time, the Fed is buying investment-grade corporate bonds. The more liquid parts of our market have responded well to the global stimulus. On the negative side, it's clear that getting through this crisis is coming with a significant economic cost, and it's difficult to get a lot of confidence given the speed and magnitude of change.

Performance has started to improve, while liquidity has returned as has some rationality. We have argued that core fixed income should act as a ballast for investors, so from that perspective, we feel like we have underperformed. But that has come with a large degree of dislocation in credit markets. We’ve seen so many fear-driven trades, especially in the structured market. Levered non-agency investors have put pressure on our credit positions, regardless of rating or underwriting.

Big picture, we're seeing more rationality in the last week and performance reflects that.

Dan Henken: We do view ourselves as credit pickers as well as a core fixed income holding for an investor’s portfolio, which requires multi-sector exposure. We have those exposures, but correlations have moved much closer to one. These environments are going to be challenging for us. We were positioned for credit to have a weaker year. On Feb. 21, investment grade option-adjusted spreads (OAS) went from 99 basis points (bps) to 144 bps on March 6 – during this time we performed well. Then the fear-trade happened and OAS went from 144 bps to 373 bps and that stretch was challenging. Since March 23, spreads have started to tighten and our relative performance has been strong. Through this volatility, we have re-evaluated each of our credits to make sure we were comfortable with the exposures. We don’t see the benefit of building a portfolio that only fits 5% of the market experience. We will hang in the fight and give ourselves a chance to recover over the longer term.

What do you see in the opportunity set – are you looking to pivot the portfolio? For example, you've been underweight high yield relative to investment grade – can you make some incremental changes to the portfolio in this environment?

Dan Henken: There have been opportunities to capitalize on. We think normality has started to return to our market. The high-yield market is still largely broken from a new issue standpoint. So for us, this is really an investment-grade story, and the good news is these markets have re-opened and new issues have come back to market and we have been active there over the past two weeks. Widening in investment grade from spreads in the mid-300 bps range created opportunities and we have been fairly active. That has been a strong momentum trade with large capital structures with household names. On the flip side, we have been actively pruning some exposure where the investment thesis has changed, particularly in areas where the impact of COVID-19 is most likely to impact consumer behavior.

Lena Harhaj: The structured market has been a bit of a different environment. The structured issues take a little longer to bring to market, but a new deal hasn’t been priced since the beginning of March. We expect that to change once issuers start issuing under Term Asset-Backed Securities Loan Facility (TALF) 2.0. However, the secondary market has been pretty active. For example, short-AAA auto and credit card asset-backed securities (ABS) had spreads widen from mid-teen bps (pre-COVID-19) to 400 bps. Those spreads have come back to 100-200 bps depending on the credit. When new issues come it will be interesting to see the state of the consumer at that time and investors’ perceptions of it. Most of our positions are pointing to a seasoned deal, particularly in the credit-risk transfer (CRT) market. We’re looking at mortgages that were issued from 2014-2018, so there’s quite a bit of embedded home appreciation in those loans. Additionally, we went from 0.20% of government-sponsored entity (GSE) mortgage borrowers asking for forbearance to 2.66%. Stresses are expected at 10% levels on forbearance requests. CRT bonds went from par-to-$110 to $50-$60 prices. There were large funds liquidating positions putting pressure on those positions. They traded at stressed levels and have not recovered all of the negative return. We believe that will pan out as we see how the consumer gets through this crisis.

A big question is how long this stay at home sentiment persists – longer being worse for the consumer. If this extends, could you add value from fundamental research? Or, more broadly, how do you think about the risk of stay at home and how are you managing that dynamic?

Tom Houghton: Speaking briefly to the liquidity side of things, we did try to take advantage of some of those dislocations in structured markets, but dynamics of certain offerings limited our participation. The transparency in our markets isn't always perfect, but we're actively trying to take advantage of some of these depressed prices. When we think about stay at home, some industries will be impacted to a greater degree, like airlines. The airlines will continue to get governmental support, but this will be a bumpy ride.

What do you think it will take to close the gap on relative performance with the index?

Tom Houghton: We’ll need to see improvement in both the corporate and structured side of the portfolios, and that has been happening over the past couple weeks. CRT and non-agency securities made incremental improvements. On the corporate side, energy led the way down. Most of our exposure is in pipelines and refining, and we'll see much lower demand for gasoline over the next couple months, but people will return to driving when the economy opens back up. Taking advantage of things, we purchased bonds in this space recently. We are positioned in entities we feel are more volume-driven with less commodity exposure, which has bounced back over the last few weeks more so than exploration and production. We expect a continuation of these trends to close the gap versus the index.

You mentioned being positioned for a weaker 2020 – what do you mean by that?

Dan Henken: Corporate investment-grade credits exited 2019 with spreads inside 100 bps versus a post-crisis average of 140 bps. Over a 12-24 month period starting in 2018, we brought high yield down from double-digits to sub-5%. Corporate exposure was reduced from mid-50% to low-40%. Ninety-three bps was the tightest spread level of 2020, we expected that to leak out modestly wider and it did. In that period we outperformed. We are never going to be a manger that moves to 50-60% U.S. Treasuries – that’s not where we add value. So, we pruned the portfolio to be durable in a weakening reassessment of risk and it performed well. But then COVID-19 blew up at a rapid pace with social distancing creating flight-to-quality and a dynamic closer to what we saw during the Global Financial Crisis. We believe liquidity is starting to normalize, and while we don’t know the timeframe for full normalization, we know the Fed and government are committed to supporting the markets. We think this is early on, maybe one-third of the way of the retrenchment.

Past performance is not a guarantee of future results. This information is not meant as investment advice or to predict or project the future performance of any investment product. The opinions are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This informa¬tion is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. The views are current through April 8, 2020, and are subject to change at any time based on market or other conditions.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not in¬sured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the fund may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Mortgage-backed and asset-backed securities are subject to prepayment risk and extension risk. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

Ivy Economic Insights

Commentary as of April 07, 2020

Over the past three weeks, we have discussed the macroeconomic fallout from the coronavirus, which is still highly uncertain. The latest data has come in significantly lower than expected. Has your view on the U.S. economy changed? How do you think certain “virus first in first out” countries like China are currently faring/recovering?

The fallout from the spread of the coronavirus is still uncertain as the outcome is based on a new virus about which little is documented. Given the backdrop of the recent data, we see downside risks to our second quarter 2020 forecast of 20% quarter-on-quarter contraction.

At the same time, we think that it is more important to understand what the eventual recovery might look like. We were initially thinking that we may reach pre-virus levels in late 2021 or early 2022, but now we believe that it might take longer than that time frame. There are a few reasons why we think this:

First, we believe that it will take longer for small and medium enterprises (SMEs), which are important drivers of the economy, to recover and reach pre-virus levels. According to recent surveys, the median small business holds about 27 days of cash on hand, and a quarter of these firms have less than 13 days of cash on hand. Now that we are three to four weeks into the shutdown, revenues have dropped significantly, businesses are likely to suffer and some may be permanently damaged from the crisis.

Second, in order to receive Paycheck Protection Program (PPP) loans from the Federal stimulus package, companies must keep their employees employed. Companies that have already reduced employment must have rehired workers and kept them employed for at least eight consecutive weeks by June 30, 2020. However, the recently increased unemployment benefits are higher than the income for some workers. This could create a misalignment in which workers may not want to go back to work because they could be earning more unemployed. This situation could result in SMEs being unable to receive forgiveness on the PPP loans.

Finally, “stay at home” orders are being extended in some states that could weigh on the revenue stream of SMEs. Initially, our base case was for a six-week shutdown, but it may go longer, possibly up to eight weeks.

For “virus first in first out” countries like China, economic activity is starting to normalize, and some surveys show it is back to 60-85% of pre-virus levels. A key concern for these economies is the demand for their exports as some of their key markets (such as Europe and the U.S.) are still grappling with coronavirus stress.

In the U.S., how do you anticipate the recovery could occur?

We are thinking the recovery could occur in two phases.

First phase: We may see a rebound in the second half of 2020 as the U.S. economy starts to get back on track and lockdowns ease. Relative to historical trends, in the second half of the year we may see strong growth numbers because of the lower base.

Second phase: In our view, it is unlikely for people to get back to pre-virus economic activities instantaneously. Furthermore, depending on if we continue to have a few new cases of the virus, there might be limits on the kind of economic activities that are allowed. For example, movie theaters could be impacted or remain closed. Thus, we see the potential for residual issues to linger for longer periods of time. This could keep the U.S. economy from reaching its pre-virus level.

On the policy front, the Federal Reserve (Fed) has been continuously coming out with new programs. On April 6, the Fed announced that it will purchase new small business payroll loans in an effort to extend and strengthen lending to small businesses. How effective have these recent Fed programs been?

The Fed has taken various measures – eased monetary policy, provided unprecedented quantitative easing and rolled out bond-buying programs – in an effort to stabilize markets. These have been rolled out incredibly quickly. We still can’t gauge the total effectiveness because some of the programs aren’t up and running, but overall, in our view, these measures have been effective. For example, the purchase of new small business payroll loans is important as it will allow banks to swap the PPP loans at the Fed window for cash, preventing crowding out of other loans in the banking system.

Everyone is talking about the duration of COVID-19’s impact. What other events or indicators are you watching that could indicate a bottoming in economic growth?

First, we are watching the progression of the virus spread as this will determine how quickly economic activity starts to normalize. Second, we will be closely watching how quickly the U.S. government will start opening the economy and the impact that could have on the curve of new virus cases.

Past performance is not a guarantee of future results. This information is not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through April 7, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This information is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.

Risk factors: Investing involves risk and the potential to lose principal. Fixed-income securities are subject to interest rate risk and, as such, the value of such securities may fall as interest rates rise. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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Ivy Market Insights – First Quarter 2020 review

Commentary as of April 06, 2020

As fundamental investors, we make decisions based on analysis of the present opportunities. These recent weeks, it seems we have been digesting information from a fire hose, processing short-term information flow. We have framed the current environment on three pillars.

First is the health impact. There is speculation the trajectory of the number COVID-19 cases may hit an apex or plateau soon. The shape of the curve is a key component, but not singular and an apex is a necessary, but an insufficient signal. While this is encouraging news, it doesn’t mean we should jump in with both feet and buy the market hand over fist. Therapeutic breakthroughs could also increase confidence.

The next pillar is the macroeconomic impact, which is the real issue for investors. The self-imposed social distancing is driving the slowdown in economic activity. There have been approximately 10 million unemployment claims over the past two weeks and that will continue to climb. The shutdown is unprecedented due to its global nature, and we expect multiple apexes or rolling apexes of the COVID-19 curve, it will not be a singular event. As we get better science and operational practices around managing the curve, the question we need to answer is not if, but when will we lift the social distancing measures. We go back to the classic lens of normalized earnings power that tells us what to pay for a business.

Lastly, there is the market impact. This current period of extreme volatility reflects the general sense of uncertainty in the economic path forward.

COVID-19 IMPACT ON KEY MARKETS

Index

Peak date

Bottom date

Peak-to-Trough Drawdown

YTD

S&P 500 TR USD

02/19/20

03/23/20

-33.8%

-19.6%

Russell 1000 Growth TR USD

02/19/20

03/23/20

-31.5%

-14.1%

Russell 1000 TR USD

02/19/20

03/23/20

-34.6%

-20.2%

Russell 1000 Value TR USD

02/12/20

03/23/20

-38.3%

-26.7%

Russell Mid Cap Growth TR USD

02/19/20

03/23/20

-35.7%

-20.0%

Russell Mid Cap TR USD

02/20/20

03/23/20

-40.3%

-27.1%

Russell Mid Cap Value TR USD

02/20/20

03/23/20

-43.7%

-31.7%

Russell 2000 Growth TR USD

02/19/20

03/18/20

-40.4%

-25.8%

Russell 2000 TR USD

01/16/20

03/23/20

-44.7%

-35.7%

Russell 2000 Value TR USD

01/16/20

03/23/20

-44.7%

-35.7%

MSCI World NR USD

02/12/20

03/23/20

-34.0%

-21.1%

MSCI ACWI NR USD

02/12/20

03/23/20

-33.7%

-21.4%

STOXX Europe 600 NR USD

01/17/20

03/23/20

-35.7%

-24.3%

MSCI EAFE NR USD

01/17/20

03/23/20

-33.9%

-22.8%

MSCI EM NR USD

01/17/20

03/23/20

-33.7%

-23.6%

Source: Morningstar and Ivy Investments. Data also show performance of multiple equity indexes on year-to-date as of March 31, 2020 and peak-to-trough bases. Past performance is not a gurantee of future results

The old adage that “history doesn’t repeat, it rhymes” is in line with our thinking. Looking back at U.S. recessions since the 1940s, the typical recovery from recessionary troughs lasts around 11 months, with a normal range of eight -18 months. We expect an extended period of uncertainty and volatility in the markets as new information becomes available.

Unlike previous recessionary periods, we had an economy performing at record pace before the virus. We believe the underlying fundamentals could be in very good form to rebound when we get back to work and return to more normalcy. As active investors, we are looking bottom-up business by business, and now is the time to be a bottom-up active manager. Our end goal is to determine the long-term earnings power of companies that may be impaired by the current environment but could be taking actions to improve their business models.

We will provide a more in-depth perspective that focuses on Ivy’s market and economic outlook for second quarter 2020 in the coming days.

Past performance is not a guarantee of future results. The opinions expressed are those of Ivy Investments and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.

Risk factors: Investment return and principal will fluctuate, and it is possible to lose money by investing. Securities of companies within specific industries or sectors of the economy may periodically perform differently than the overall market.

The S&P 500® Index is a float-adjusted market capitalization weighted index that measures the large-capitalization U.S. equity market. The Russell 1000® Index is a subset of the Russell 3000® and includes approximately 1,000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 1000® Growth Index is a float-adjusted market capitalization weighted index that measures the performance of the large-cap growth segment of the U.S. equity universe. The Russell 1000® Index is a float-adjusted market capitalization weighted index that measures the performance of the small-cap segment of the U.S. equity universe. The Russell 1000® Value Index is a float-adjusted market capitalization weighted index that measures the performance of the large-cap value segment of the U.S. equity universe. The Russell Midcap® Growth Index is a float-adjusted market capitalization weighted index that measures the performance of the mid-cap growth segment of the U.S. equity universe. It includes those Russell Midcap® Index companies with higher price-to-book ratios and higher forecasted growth values. The Russell Midcap® Index is a float-adjusted market capitalization weighted index that measures the performance of the mid-cap segment of the U.S. equity universe. The Russell Midcap® Value Index is a float-adjusted market capitalization weighted index that measures the performance of the mid-cap value segment of the U.S. equity universe. The Russell 2000® Index is a float-adjusted market capitalization weighted index that measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000® Index is a subset of the Russell 3000® and includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000® Growth Index is a float-adjusted market capitalization weighted index that measures the performance of the small-cap growth segment of the U.S. equity universe. The Russell 2000® Value Index is a float-adjusted market capitalization weighted index that measures the performance of the small-cap value segment of the U.S. equity universe. The MSCI World Index captures large and mid cap representation across developed markets countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country. The MSCI ACWI Index captures large and mid cap representation across developed markets and emerging markets countries. The STOXX Europe 600 Index is a float-adjusted market capitalization weighted index that measures the small-, medium-, and large-capitalization companies of 17 European countries. The MSCI EAFE Index is an equity index which captures large and mid cap representation across developed markets countries around the world, excluding the US and Canada. The MSCI Emerging Markets Index captures large and mid cap representation across emerging markets countries. It is not possible to invest directly in an index.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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Dan Hanson, CFA

Article Short Summary:

The first quarter of 2020 was eventful to say the least. Dan Hanson, CIO, provides a market recap and view moving forward.

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Proactive social distancing actions — the upending of daily activities — intended to slow the spread of COVID-19 have abruptly put the brakes on the global economy. We have been framing our ongoing analysis of the volatile investment landscape as a function of: 1) public health impact, 2) macroeconomic impact, and 3) market impact. At present, based on the still exponential ramp of cases in the U.S., uncertainty is extreme. In the coming weeks, increasingly robust data will provide better definition of the health impact, such as has the COVID-19 curve flattened? That data will allow calibration of the social distancing measures and improved definition of the macroeconomic impact. In turn, markets will benefit from a reduction of uncertainty and improved visibility regarding a path towards “normalization” of economic activity, as we’ve already begun to see in China. Dan Hanson, CFA, Chief Investment Officer, recently sat down with key members of the Ivy Investments team to discuss the economic and market implications of the COVID-19 outbreak.

COVID-19 IMPACT ON KEY EQUITY MARKETS

US (S&P 500 Index)

Europe (STOXX
Europe 600 Index)

YTD decline

-21.4%

-26.9%

Peak-to-trough decline

-33.5%

-35.3%

Source: Macrobond, Ivy Investments. Data also show performance of the S&P 500 Index and STOXX
Europe 600 Index on year-to-date and peak-to-trough bases. Past performance is not a guarantee of
future results.Data provided as of April 2, 2020.

AVERAGE ECONOMIC, EARNINGS AND MARKET DECLINE
AROUND RECESSIONS

US (S&P 500 Index)

Europe (STOXX
Europe 600 Index)

GDP

-2.2%

-2.6%

EPS

-37.0%

31.0%

Markets

-29.0%

-39.0%

Source: Macrobond, Ivy Investments. Data show the average metrics of GDP, earning per share (EPS)
and index performance for all U.S. recessions since 1945, and all recession in Europe since 1990. Data
timeframes reflects peak (prior to recession) to trough (nadir of recession). Past performance is not a
guarantee of future results.

Dan Hanson: : Taking stock of the impact to markets, U.S. and global markets are clearly embedding an economic downturn related to the COVID-19 outbreak, and more generally, the extreme market volatility reflects the extreme uncertainty of the trajectory of the health and economic impact. Year-to-date as of April 02, 2020 (as represented by the S&P 500 Index) U.S. markets are down 21% and peak-to-trough, or the drop from peak, (Feb. 19–Mar. 23, 2020) is down 33%. In Europe, year-to-date returns through April 02, 2020 (as represented by the STOXX Europe 600 Index) are down 27% and peak-to-trough (Jan. 17 – Mar. 23, 2020) is down 35%.

What is your view on the impact of the COVID-19 outbreak on the economy and financial markets?

(click to view the responses from different members of our investment team)

Kimberly Scott, CFA

Generally, we take pride in staying ahead of macro events but none of us expected or anticipated the depth or duration of the impact the COVID-19 outbreak has already had and could continue to have. The disruption is impacting some business models and company profits. So, we know that we will be dealing with big downside numbers in the near term, but as we have said before, we still believe this will be a transitory event. The coronavirus pandemic is driving the headlines and rightfully so, but we are also thinking about the potential political impact. Voters will be watching how this administration responds. If they feel it is mismanaged, that could lead to a shift in Washington, and investors will begin asking what happens to corporate profits if the 2017 tax reform gets walked back.

Nathan Brown, CFA

If we got on an airplane at the beginning of 2020 and that plane was going to fly for two years, as we think about the markets, the destination may not be all that different. Without a doubt, there has been significantly more turbulence on that flight than we expected. I think it’s important to keep in mind that, when we entered the year, we could not have expected the amount of monetary and fiscal stimulus that is now a certainty. It’s possible that in two years, we may be in a better position because of this stimulus.

Jonas Krumplys, CFA

Portfolio Manager - Ivy Emerging Markets Equity Fund

We have witnessed two black swan events – outbreak of COVID-19 and the oil war that was initiated by a conflict between Saudi Arabia and Russia.

A few Asian countries have been able to control the outbreak. For example, in China, for the first time no new coronavirus cases were reported (March 18, 2020). Moreover, some data indicates economic activity is starting to normalize. Other countries, such as Taiwan, South Korea and Singapore, have also been somewhat successful in containing the COVID-19 outbreak. In terms of economic growth, given cancellation in activities and lockdown measures in cities, we expect to see large negative economic numbers for the first quarter and possibly for the second quarter as well. Overall, it has been very interesting to see governments willing to slow down economic growth to fight the spread of the virus.

For financial markets, the U.S. dollar has strengthened. With oil falling more than 60%, commodity currencies are depreciating more versus commodity importers. While the broader risk-off sentiment is partly responsible for the U.S. dollar strength, stress in U.S. funding is also contributing to the dollar appreciating. To release the stress in U.S. dollar funding, the U.S. Federal Reserve (Fed) has beefed up swap lines with emerging markets such as Brazil, South Korea, Mexico and Singapore, and with some developed markets such as Australia, Norway, Denmark and Sweden.

Aditya Kapoor, CFA

Portfolio Manager - Ivy Emerging Markets Equity Fund

The COVID-19 outbreak now has developed into a global demand shock. So, while the virus outbreak in China and in some emerging markets seems to be under control, we are watching the virus outbreak in the U.S. and Europe to evaluate the impact a slowdown in these economies could have on emerging markets through trade linkages.

Chad Gunther

Portfolio Manager - Ivy High Income Fund

The coronavirus is impacting the credit markets, but so is uncertainty around OPEC and oil. The Fed’s decision to have unlimited resources to buy investment grade bonds, municipal bonds, etc. has helped take a little risk off the left-hand side of the tail. Regarding the impact from energy, OPEC did something similar in 2014, saying they were going to keep production high and not worry about oil prices. Oil bottomed about two months later and didn’t look back until recently. High yield spreads passed 1000 basis points, and spreads on CCC-rated issues were over 1,800 basis points. This has represented a good opportunity for investors in previous cycles.

The broad markets have fallen by more than a third from their early 2020 peaks, really for reasons no one could have predicted coming into the year. How has your portfolio performed? Is it what you would have expected in this type of environment?

(click to view the responses from different members of our investment team)

Brad Klapmeyer, CFA

Portfolio Manager - Ivy Large Cap Growth Fund

Since the Russell 1000 Growth Index, the Fund’s benchmark, peaked on February 19, 2020, the Fund has performed well relative to its benchmark index and Morningstar peer group. We would typically expect the Fund’s skew to high-quality companies to benefit performance in these types of market drawdowns, and so far, that has been the case.

Kimberly Scott, CFA

The Ivy Mid Cap Growth Fund has had a constructive year relative to its benchmark index and Morningstar peer group. In the initial days of the COVID-19 outbreak, when the virus appeared to be limited to China, impacts were felt in the domestic U.S. information technology sector. The Fund is currently underweight this sector. During this early phase, most of the Fund’s sectors including health care, industrials, communication services and consumer discretionary all did well. As the outbreak spread domestically, we saw an impact on the Fund’s consumer discretionary and health care holdings. We believe the lowering of interest rates is more of a credit issue than an opportunity to take on cheap debt. We believe the Fund’s portfolio of companies with strong balance sheets is more helpful in this kind of environment.

Nathan Brown, CFA

The Ivy Mid Cap Income Opportunities Fund has modestly underperformed its benchmark index, although we are outperforming our Morningstar Mid-Cap Value peers. We entered the selloff underperforming areas of strength such as software companies. This is because we don’t see a strong opportunity set in that group, as software companies in the mid-cap space do not generally match the Fund’s dividend yield requirement of greater than 0.5%. Another very important consideration for us right now is the sustainability of dividends. If the COVID-19 outbreak continues to impact businesses for an extended period of time, the ability of these companies to pay out dividends could be hampered. Recent detractors to Fund performance have included investments in the consumer discretionary, communication services and energy sectors. We believe this event will be transitory for companies within the consumer discretionary and communication services sectors. However, given the recent global uncertainty in energy, we believe the outlook for that sector has changed.

Chace Brundige, CFA

Portfolio Manager - Ivy Asset Strategy Fund

Up until last week, the Fund was behaving in line with our expectations given where our risk budget stood. However, recently, correlations across asset classes have risen sharply and that has created a pain point for us. The equity portion of the portfolio has roughly performed in line with the MSCI ACWI Index. Gold had been a strong performer through most of the year but it has struggled recently. There's a high correlation between gold and equities right now.

Jeffery Surles, CFA

Portfolio Manager - Ivy Asset Strategy Fund

Much of the underperformance has come from the fixed-income portion of the portfolio, with high yield and emerging markets taking the biggest losses. If this market volatility continues for a long time, there will be many companies in this space that will face serious trouble rather quickly.

Aditya Kapoor, CFA

Portfolio Manager - Ivy Emerging Markets Equity Fund

The Fund has performed well relative to its benchmark. Recent events are evidence to what we have been saying for a while – emerging markets have changed from what they were 20 years ago. Emerging markets are no longer a hyper cyclical, commodity boom-or-bust story. Testimony to our belief is that despite the recent oil price drop, emerging-market stock prices are down less than U.S. stocks. Having said that, we didn’t anticipate Brazil to react with such high beta to global volatility. This could be because global investors still haven’t priced in the domestic geopolitical improvements in Brazil, and still invest in the economy as if it were only commodities driven.

John Maxwell, CFA

Portfolio Manager - Ivy International Core Equity Fund

Overall, the portfolio is defensively positioned; however, the oil war that was initiated by a conflict between Saudi Arabia and Russia has hurt portfolio performance. The virus has overshadowed the deep plunge in oil prices. We believe the companies we own are lower on the cost curve versus what we can buy in the developed world outside of Saudi Arabia and Russia. We are not adding to upstream positions or producers right now. Generally, we would expect to perform better in a pullback because we believe the stocks we own are less expensive and not widely owned, but the unprecedented event in the oil market has been the main detractor.

Chad Gunther

Portfolio Manager - Ivy High Income Fund

We came into this crisis well ahead of our benchmark and Morningstar High Yield Bond peers. Subsequent to the market peak and historic downturn, absolute and relative performance has suffered. The downdraft has been so swift and dramatic that the ability to move in and out of risk isn't realistic – it can't be done. I do think we'll get through this. We have maintained cash at around 3%, and outflows have been very manageable. Issues that have sold off the most, we're holding. We continue to have conviction in our investment theses.

Considering current events, what adjustments have you implemented in your portfolios?

(click to view the responses from different members of our investment team)

Nathan Brown, CFA

Overall, we continue to believe the COVID-19 outbreak will ultimately lead us to opportunities that will allow us to invest in companies at more attractive valuations. Given this, we have added exposure in the financials sector of the Ivy Mid Cap Income Opportunities Fund as we think there is an opportunity to invest in several well-known businesses at attractive valuations.

Kimberly Scott, CFA

We will always steer both of our mid-cap strategies in line with their core investment philosophies and processes. For Ivy Mid Cap Growth Fund, we will continue to seek fundamentally strong business models that are available at what we feel are more attractive and compelling valuations relative to where the business would normally trade.

Brad Klapmeyer, CFA

Portfolio Manager - Ivy Large Cap Growth Fund

The Fund’s positioning has not changed materially as a result of recent market events. We have positioned the portfolio into companies where we have high conviction in their long-term ability to execute and withstand market disruptions. We continue to focus on underlying business models, not emotions or the news of the day.

We have been watching valuation spreads closely, which means we are keeping an eye on the valuation difference between what is typically considered “cheap” and “expensive” companies. Until recently, market leaders continued to get more expensive and market laggards became cheaper. Coming into 2020, these spreads suggested a positive environment for value investors, with spreads seeming quite wide. Eventually a tipping point is reached where the cheapest companies are too cheap and the most expensive are too expensive, and that starts to reverse. The impact of new quantitative easing and fiscal stimulus could be that tipping point, where those companies that had been left for dead are now resuscitated and starting to lead during the initial recovery. Many of these types of businesses fail to align with the core tenets of the Fund’s philosophy – owning enduring, competitively advantaged business models – but we will look for strong businesses amidst the rubble to tilt the portfolio toward companies that can participate in that environment.

Chace Brundige, CFA

Jeffery Surles, CFA

Portfolio Manager - Ivy Asset Strategy Fund

In fixed income, we're looking for credits we believe can continue to generate cash through this downturn given distressed pricing. However, there are also some perceived dislocations that we'd like to take advantage of, but we haven't been able to do so because of poor liquidity. The Treasury market is suffering from poor liquidity for several reasons. Volatility-targeting strategies, such as risk parity and long/short strategies, are pressuring liquidity because they oftentimes leverage Treasuries by 5x-10x. However, the Fed's plan to buy $500b in Treasuries will help open up liquidity.

Jonas Krumplys, CFA

Portfolio Manager - Ivy Emerging Markets Equity Fund

Before the recent oil war started, we had been cutting our exposure in Brazil and to oil-related companies. Furthermore, a longer-term event we have been watching is the strategic rivalry between the U.S. and China. In our view, despite the phase 1 trade deal, the trade war is far from finished. With this backdrop, we have avoided investing in Chinese technology companies with dependencies on U.S. technology. Moreover, we have reduced exposure to export-based companies in China. Overall, we have taken advantage of several perceived recent price dislocations in several stocks. There are business models that, we believe, may fare better than others through the virus outbreak. As already seen in the performance of the consumer discretionary sector, various internet companies may continue to benefit as more people avoid going out and choose to go online for their business. Also, video game use has surged during the virus outbreak. We like business models in e-commerce and consumer durables that may be able to gain market share. Also, with long school closures, we believe companies with online education services are well positioned in today current environment.

John Maxwell, CFA

Portfolio Manager - Ivy International Core Equity Fund

We are not dramatically changing our Fund positioning. We have slightly increased the cyclical weighting but are still underweight cyclicals. We aren't dipping into the unknowns like airlines or hotels, but are buying stocks that are down significantly and are in industries we expect to be more stable based on our long-term understanding.

Catherine Murray

Portfolio Manager - Ivy International Core Equity Fund

Most countries have followed the U.S. in cutting rates, with the U.S. being most aggressive. In two of our biggest markets, Europe and Japan, the central banks have not cut rates because they're both already in negative territory. The Fund remains underweight financials, about 80% of benchmark weight. Within financials, we remain overweight countries and companies that we believe are less affected by the rate environment or positively impacted by the rate changes.

Chad Gunther

Portfolio Manager - Ivy High Income Fund

We're watching downgrades more so than defaults, especially as BBB-rated companies fall to BB ratings. For example, many large and strong companies being downgraded into high yield are creating opportunities for investors like us. Plus, we should keep in mind that oil isn't going away. Demand may fall, but there could be some opportunities in the better-run companies.

What is your view on the latest Fed action and the market’s reaction? In addition, what other policy tools do you think are left in the Fed’s toolbox?

(click to view the responses from different members of our investment team)

Derek Hamilton

Global Economist

On the policy front, I think central banks and governments globally are aligned to help cushion the economic fallout from the COVID-19 outbreak. In the U.S., the Fed cut interest rates to between 0% and 0.25%. In this situation, fiscal policy is typically more effective, which is why the U.S. passed a $2 trillion policy package. The fiscal stimulus will allow the Fed to act as a commercial lender as the package provides $400 billion, which can be levered 10 times, for the Fed to lend directly. In the future, we might get more help for small- and medium-sized enterprises and extension in unemployment insurance.

To answer your question about more ammunition, I believe the Fed has limited dry powder available. In my view, it can ramp up QE or theoretically could be pushed to take the currently unfavorable route of negative interest rates. I believe the central bank could implement a policy like that in Europe and Japan – funding for lending scheme – where it could provide cheap loans (at a lower cost than loans from the discount window) to financial institutions to lend to small and medium enterprises. Overall, in this environment, the central bank’s focus is on providing liquidity so that markets function smoothly.

Chad Gunther

Portfolio Manager - Ivy High Income Fund

The Fed's decision to provide unbounded resources to buy investment grade credit and municipal bonds has helped take a little risk off the left-hand side of the tail. In terms of dislocation, this is moderately similar to what we witnessed in 2008. The Fed left some details open to interpretation, but it is basically saying it will make sure liquidity continues to exist.

Historically, these types of environments have been a great buying opportunity. When spreads blow out to levels they’re at now, returns 1-year into the future have almost always been positive, and if you go out beyond a year, they've historically been even more attractive.

Dan Hanson: Thanks all for your input regarding how you’re managing during this volatile environment. We believe that high uncertainty and volatility in the markets can translate to meaningful opportunities for selective active managers, and our focus on the fundamentals at Ivy provide a clear framework to separate the noise from information.

Stay up to date on the latest financial impact of COVID-19

The opinions and commentary expressed are those of Ivy Investments and are not meant as investment advice or to predict or project the future performance of any investment product. The companies discussed by the panel may or may not be holdings in investment portfolios managed by Ivy, and such discussion is not intended to reflect a current or past recommendation, investment advice, an indication of trading intent, or a solicitation of an offer to buy or sell any securities or investment services. This is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any speciﬁc security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s speciﬁc objectives, ﬁnancial needs, risk tolerance and time horizon. The views of the panel are current through the date of the event and are subject to change at any time based on market or other conditions. No forecasts can be guaranteed.

The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-capitalization U.S. equity market. The STOXX Europe 600 Index is a float-adjusted market capitalization weighted index that measures the small-, medium-, and large-capitalization companies of 17 European countries. The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. The MSCI ACWI Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI consists of 46 country indexes comprising 23 developed and 23 emerging market country indexes. The developed market country indexes included are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. The emerging market country indexes included are: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey* and United Arab Emirates. It is not possible to invest directly in an index.

Morningstar High-Yield Bond category includes funds with at least 65% of assets in bonds rated below BBB. Morningstar Mid-Cap Value category includes companies that look for U.S. stocks that are less expensive or growing more slowly than the market. The U.S. mid-cap range for market capitalization typically falls between $1 billion-$8 billion and represents 20% of the total capitalization of the U.S. equity market. Value is defined based on low valuations and slow growth.

Risk factors: Investing involves risk and the potential to lose principal. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Fixed income securities are subject to interest rate risk and, as such, the value of such securities may fall as interest rates rise. Securities of companies within specific industries or sectors of the economy may periodically perform differently than the overall market. Investing in companies involved primarily in a single asset class may be more risky and volatile than an investment with greater diversification.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

Several technical terms and acronyms were used throughout this commentary. Quantitative Easing (QE) is the introduction of new money into the money supply by a central bank. Fiscal stimulus refers to increasing government consumption or transfers or lowering taxes. Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price. OPEC is defined as an abbreviation for Organization of Petroleum Exporting Countries, which is a union of oil producing countries that regulate the amount of oil each country is able to produce. The U.S. Federal Reserve (Fed) is the central bank of the U.S. The Fed regulates the U.S. monetary and financial system. The Federal Reserve System is composed of a central governmental agency in Washington, D.C., the Board of Governors, and 12 regional Federal Reserve Banks in major cities throughout the U.S. Beta is a measure of a security or portfolio’s sensitivity to market movements (proxied using an index.) A beta of greater than 1 indicates more volatility than the market, and a beta of less than 1 indicates less volatility than the market. Leverage is an investment strategy of using borrowed money – specifically, the use of various financial instruments or borrowed capital – to increase the potential return of an investment. Leverage can also refer to the amount of debt a firm uses to finance assets. A CCC- or BB-credit rating is a non-investment grade rating which implies that a company's bonds are high-risk. A BBB-credit rating is an investment-grade rating which implies a relatively low-risk bond or investment.

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Dan Hanson, CFA, Chief Investment Officer, recently sat down with key members of the Ivy Investments team to discuss the economic and market implications of the COVID-19 outbreak.

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Story Highlights:

- We take pride in staying ahead of macro events but none of us expected or anticipated the depth or duration of the impact the COVID-19 outbreak has already had and could have.

- We have witnessed two black swan events – outbreak of COVID-19 and the oil war that was initiated by a conflict between Saudi Arabia and Russia.

- Overall, we continue to believe the COVID-19 outbreak will be a transitory event that will allow us to invest in companies at more attractive valuations.

- Overall, for QE, we expect the central bank to buy a heavy amount initially to signal to the market that it will do whatever is needed to maintain enough liquidity in the system and ensure that the markets are functioning smoothly.

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Ivy Sector Insights – Consumer discretionary

Commentary as of April 3, 2020

What three things should long-term investors consider when it comes to apparel and luxury goods?

The first is who will survive? While we expect many companies will survive, our focus is on identifying companies we believe are best positioned to survive this current environment without diluting equity shares or raising additional capital. Balance sheets and liquidity are of upmost importance when looking at companies at this time. Other considerations include whether companies currently are able to generate revenue via e-commerce channels while most brick and mortar locations are shut down. Regional exposure generally is also helpful.

Companies with seasonal skews outside of the current timeframe may fare this environment well. For example, a winter clothing company's sales may not be as heavily impacted in this current market since its peak sales have already occurred.

Secondly, investors should take a longer-term view when analyzing an investment opportunity and consider how a company's business model will look when this pandemic subsides. As part of that analysis, we want to determine how long will it take demand and profitability to reach normal levels, as well as how long will it take for demand to reach peak levels of the past.

Lastly, investors need to consider whether the potential returns from an investment opportunity are? worth the risks of uncertainty inherent in this environment. It’s important to keep in mind most companies haven’t reported earnings yet so we have yet to see the worst of the downturn in company fundamentals. Assessing how this selloff has been relative to past bear markets and where valuations are relative to past bear market troughs can be very helpful in providing context as an investor.

With stimulus checks soon being distributed, which areas of retail do you think will benefit the most?

We believe most of those checks will go toward consumer staples goods. In terms of consumer discretionary, one area we believe could benefit is athletic brands since exercising is one of the few activities people are still able to do. On a relative basis, these types of companies are likely to be better positioned to capture consumer spending in the near term.

For example, Nike has an entire ecosystem of apps, offering everything from in-home workout instruction to tracking consumer workout progress. The company reportedly saw an increase in its app adoption in China during the country’s lockdown period. Under Armour and Adidas also have fitness apps and could benefit in this environment. We also wouldn’t be surprised to see a shift from dress clothing spending to more comfortable clothing like athletic wear with so many consumers working from home.

Within your coverage universe, how do you distinguish the difference between a company's temporary impact to earnings power versus a more permanent impact to earnings power?

We believe even the stronger brands are likely to see an element of deferred sales and lost sales. There are products sitting on shelves that will get sold eventually, but most likely at drastically reduced prices. In addition, seasonal categories have a more finite shelf life and a portion of these inventories likely will go unsold. As we consider what demand trends will look like whenever we get back to a more normal level, we believe athletic brands are currently well positioned, with demand as good or better on the other side of this. On the opposite side of the spectrum, we believe luxury goods may suffer somewhat once the market recovers. During the last major economic downturn, the consumer became more value conscious, which is a trend that could repeat itself.

Why would apparel or athletic manufacturers have a brick and mortar presence when they could simply sell direct online or via an anchor store in a mall and not take on the risk?

Brands view brick and mortar as a necessary evil because they offer broad distribution, reach, and more control over product lines than in the wholesale channel. Certainly the stronger brands that are traffic drivers – Nike or Under Armour – are directing clients to their own direct channels. Selling everything through e-commerce isn't realistic because of the convenience aspect of going to a physical store and the brand awareness they can provide. There is a necessity to have physical stores even as the world continues to shift toward e-commerce.

We look for companies that analyze their consumer demographics and market segmentation and use that data to best serve their consumer base. The best business models adapt to consumer needs because there's not just a "one size fits all" model. Many high-end brands use their e-commerce business for new releases, while more price-conscious consumers may find more value in factory stores. We don't think that will cannibalize sales from the high-end shopper who wants the latest and greatest product. In high-end luxury, you wouldn't want to wholesale because that would take away from the branding. We think the bottom line is that it really depends on the business model and the market segmentation.

Past performance is no guarantee of future results. The opinions expressed are those of Ivy Investments and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.

Risk factors: Investment return and principal will fluctuate, and it is possible to lose money by investing. Securities of companies within specific industries or sectors of the economy may periodically perform differently than the overall market.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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